The influence of annealing atmosphere on mechanical and wear properties of free-cutting phosphor bronze alloy was investigated. After annealing in vacuum, the mechanical properties of the alloy decreases due to vaporization of alloying element. In addition, the softening of matrix induces decreasing the wear resistance dramatically. In contrast, high mechanical properties were observed in the alloy annealed in air and in nitrogen atmosphere. In particular, a large smearing of lead in the alloy annealed in air atmosphere was observed and was affected on the enhancement of wear resistance. Consequently, annealing in vacuum atmosphere is not suitable for high mechanical properties and wear resistance.